Some US unemployment pain is avoidable

BARRY EICHENGREEN

Last updated 08:15 15/06/2012

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The United States today is facing a crisis of long-term unemployment unlike anything it has seen since the 1930s. Some 40 per cent of the unemployed have been out of work for six months or more, which, as United States Federal Reserve Board Chairman Ben Bernanke noted in a recent speech, is far higher than in any other post-World War II recession.

OPINION:
This crisis of long-term unemployment is having a profoundly damaging impact on the lives of those bearing the brunt of it. We know this thanks to a series of careful studies of the problem conducted in the depths of the 1930s Great Depression.

The most famous such study was conducted by E Wight Bakke, a graduate student and subsequently a professor of economics at Yale University.

Bakke showed how extended spells of unemployment caused workers' skills to deteriorate and made it difficult for them to acquire new ones. The long-term unemployed also experienced a variety of physical and psychological problems, among them demoralisation, apathy, and a sense of social isolation.

For those unfortunate enough to experience it, long-term unemployment is a tragedy. And, for society as a whole, there is the danger that the productive capacity of a significant portion of the labour force will be impaired.

What is not well-known, however, is that in the 1930s, the United States, to a much greater extent than today, succeeded in mitigating these problems. Rather than resorting to layoffs, firms had their employees work a partial week. The average work week in manufacturing and mining fell from 45 hours in 1929 to 35 hours in 1932. We know this from a 1986 article by my Berkeley colleague James Powell and his co-author, none other than Ben Bernanke.

The 24 per cent unemployment reached at the depths of the Great Depression was no picnic. But that rate would have been even higher, had average weekly hours for workers in manufacturing remained at 45. Cutting hours by 20 per cent allowed millions of workers to stay on the job.

Why was there so much work- sharing in the 1930s? One reason is that government pushed for it. In his memoirs, President Herbert Hoover estimated that as many as two million workers avoided unemployment as a result of his efforts to promote work-sharing.

Second, legislation encouraged it. The industrial codes of the New Deal set ceilings on the work week for specified industries and workers. The Fair Labor Standards Act provided incentives by requiring overtime pay for employees working long hours.

Third, there was no unemployment insurance to discourage it. An individual today, faced with the option of working 20 hours a week or drawing unemployment benefits, might be tempted by the latter. But in the 1930s, before unemployment insurance, 20 hours was better than nothing.

But unemployment insurance could be restructured to encourage work-sharing. Partial benefits could be paid to workers on short hours, rather than limiting payments to those who are fully unemployed.

The programme would at least partly pay for itself, with additional payments to workers on short hours offset by lower unemployment.

In fact, the US already has something along these lines: a programme known as Short-Time Compensation. Workers can collect unemployment benefits pro-rated according to their hours when their employer submits an approved work-sharing plan, while the federal government compensates the states for a portion of the set-up costs. At last count, 24 states have begun adapting their unemployment- insurance systems to take advantage of the measure.

Unfortunately, the financial incentives that the federal government provides are mainly limited to helping the states to advertise and automate their programmes. And those programmes are too modest, especially for senior workers with a reasonable expectation of fulltime work, to make work- sharing an attractive option.

Other countries have gone further. In Germany, the federal government's Kurzarbeit programme makes up a significant fraction of the difference when, owing to short hours, a worker's earnings fall by more than 10 per cent.

The US federal government could emulate this example by compensating the states more generously for their Short-Term Compensation programmes. Its failure to do so not only inflicts avoidable pain and suffering on the unemployed, but also threatens to inflict long-term costs on American society.

* Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley.